Roth IRA - All posts tagged Roth IRA

Are Americans getting more serious about saving for retirement? Data released by Fidelity Investments today suggests that the answer could be yes.

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IRA savers are building up their stashes.

Among investors who hold individual retirement accounts at Fidelity and contributed to those accounts in 2013, the average contribution was $4,150 —a record high level that’s up 5.7% from 2012.

Thanks in part to the rising stock market, the average account balance among all 7 million IRAs at Fidelity rose 10% to $89,100 – also a record high.

Older investors closer to retirement aren’t the only ones getting religion about saving. While investors in their 50s, 60s, and 70s raised their 2013 IRA contribution levels by an average of 5.6%, 5.8% and 7.1%, respectively—contribution rates increased among all age groups, according to Fidelity. Younger investors—in their 20s, 30s, and 40s—increased their contribution rates by 3.9%, 6.7% and 6.2%, respectively.

Rep. David Camp (R, Mich.) should be praised for his bold blueprint to reform the nation’s tax system. The plan dramatically broadens the tax base through the elimination of exemptions and deductions and collapses the current seven marginal rates into three – 10%,25% and 35%. The 35% rate affects households with incomes of $450,000 or more for couples and $400,000 for single filers; this rate is also applied to an expanded definition of taxable income. The purpose of the proposed tax structure is twofold: to impose a higher marginal rate on the higher paid and, with regard to retirement saving, to limit the value of certain tax benefits to 25%.

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One of these would get simpler under Camp’s plan.

The current personal income tax encourages retirement saving by allowing individuals to defer the tax on contributions to retirement plans and on the earnings on those contributions until participants receive income in retirement. The biggest reward, however, goes to high earners. A high earner saves 35 cents on the dollar by participating in a 401(k) plan. The comparable benefit for a low earner is 15 cents on the dollar. In terms of simple fairness, it makes no sense to have the size of the incentive depend on earnings. Moreover, the high earner would probably have saved without any tax incentive, while the middle income may well not have.

As of Sept. 30, investors held $11.8 trillion in IRAs, 401(k)s and related tax-deferred accounts. That’s up from $6 trillion at the end of 2003, according to the Investment Company Institute, a trade group. The increase reflects a fundamental shift in retirement finances: the demise of traditional pensions and the central role now played by defined-contribution plans, where workers shoulder the responsibility for building a nest egg.

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The name of the game: Keep your bracket low.

Uncle Sam, of course, requires account holders – after reaching age 70½ – to begin withdrawing a minimum amount each year, based on their age and account balance. Frugal investors typically delay withdrawing any funds before that age to let their accounts grow, but as Arden Dale of The Wall Street Journal has noted in recent coverage, waiting to withdraw can push individuals into higher income-tax brackets and increase the taxes owed.

You’re in your early 60s and thriving. You’ve saved a half-million bucks in your IRA, and since you’ve got other income or other savings you don’t need to tap it until you’re required to, at age 70 ½. So you should leave the IRA alone and let it grow, right?

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Tapping savings now, to reduce taxes later.

Not necessarily, say many financial planners. In fact, depending on your other circumstances, making withdrawals in your 60s could help you stretch your savings longer, by reducing your income-tax bill later in life.

The issue, as Arden Dale explains this week in The Wall Street Journal’s Wealth Adviser section, is that once you reach the age-70-½ threshold, you have to take a “required minimum distribution” (or RMD) of a certain percentage of the assets in the account. Withdrawals from a traditional IRA are taxed as income, so the bigger your IRA is after 70, the greater the chance that the RMD will push you into a higher tax bracket. In contrast, you might be in a relatively low tax bracket in your mid-60s, where the income from an IRA withdrawal won’t come back to bite you

Americans converted $64.8 billion of their retirement assets from traditional IRAs to Roth IRAs in 2010, an increase of more than 800% from the $6.8 billion that was converted the previous year, according to statistics released this month by the Internal Revenue Service. The figures show the impact of a change in tax policy that made Roth conversions much easier for higher-income savers – and it also suggests that many of those high earners suspect that their income tax rates will be higher by the time they retire.

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For your future self, the gift of lower taxes.

Traditional IRAs are funded with pre-tax dollars, and in retirement, withdrawals are taxed as ordinary income. Roths, on the other hand, are funded with after-tax dollars, and withdrawals from a Roth IRA aren’t taxed, as long as the assets have been in the account for at least five years. When you convert a traditional account to a Roth, you pay taxes on the lump sum that you convert.

Roth IRAs are a potent weapon retirees can use to minimize their taxes in retirement. According to new data from Fidelity Investments, they seem to be catching on.

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Changing IRA buckets can cut future tax bills.

Through Oct. 31, Roth conversion activity at Fidelity rose 12% over the same period last year. The conversion rate is more than double that of 2009. Because it oversees about 2 million investor accounts, Fidelity’s reports on its accountholders activities are often seen as a good proxy for what’s going on among retirement savers in general.

“We’ve seen monthly conversions regularly coming in higher than last year by 10% to 15%,” says Ken Hevert, vice president of retirement products at Fidelity Investments. “We expect that trend to continue.”

Amid the summer doldrums, Senator Orrin Hatch of Utah, the ranking Republican on the Senate Finance Committee, has proposed a law with a catchy moniker and provisions that could make it easier for some workers to boost their retirement savings.

Hatch’s bill aims at 401(k)s.

Among other things, the Secure Annuities for Employee (SAFE) Retirement Act of 2013, which Hatch unveiled in a speech on July 9, addresses a problem associated with the trend towards automatic enrollment of employees into 401(k) retirement savings plans. Specifically, the Act would allow companies that automatically enroll their employees—and then “auto-escalate” their savings rates each year– to go beyond the current cap of 10% of pay. According to a summary, the Act would eliminate the 10% upper limit for the auto-escalation feature.

Over the last few years, the nonprofit Employee Benefit Research Institute has built and tracked a database of individual retirement accounts (IRAs) that now includes more than 20 million accounts, holding about a third of the nation’s IRA assets. EBRI just released its latest analysis of the database, which tracks the habits of IRA account owners in 2011. And their findings include some data that may testify to the growing attractiveness of Roth IRAs—accounts from which retirees can withdraw money after age 59 ½ without being taxed on their principal or investment returns.

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For starters, Roth IRAs, which have only been around since the late 1990s, seem to be consistently attracting more money than traditional IRAs. In 2011, Roths in the EBRI database received $3.7 billion in new contributions, while traditional IRAs got $2.3 billion – despite the fact that there are nearly three times as many traditional IRAs as Roths in the database. (One noteworthy caveat: This figure doesn’t include rollovers from 401(k)s, which involve a much larger pool of money and are much more likely to go to traditional IRAs, since rolling them into a Roth usually involves extra steps and a hefty tax bill.)

Whatever happens to our income tax rates in the near future, they’re unlikely to get any lower. That fact can have major implications for your retirement savings, since withdrawals from traditional retirement accounts are taxed at ordinary income rates. Hence the appeal of converting a traditional IRA to a Roth IRA—an account that’s funded with after-tax dollars, so withdrawals are income-tax free.

Converting isn’t a slam-dunk for everyone, however, since complicated tax regulations (and a hefty up-front tax payment) usually accompany the switch. MarketWatch’s IRA to Roth IRA Conversion Calculator can help savers do the math and decide whether the transaction makes sense. Like all of MarketWatch’s retirement tools, it’s free to use.

In a series this week and next, MarketWatch’s retirement columnists offer their best wishes for the season—and a few tips for to help readers move from wish to reality. First up: Andrea Coombes, our resident expert on taxes.

Taxes. Not exactly a holiday topic, nor something you want to bring up as you cuddle under the mistletoe. Yet with days left before 2012 ends, lawmakers continue to wrestle over how to deal with myriad expiring tax cuts. Their inability to reach an agreement could add up to a $2,000 tax hit, on average, for middle-income families. Just a couple of the highlights: Tax rates on dividend income are set to jump to ordinary income rates, and the alternative minimum tax could ensnare a total of 31 million in 2012, if Congress doesn’t enact the AMT patch.

Now, I’m a tax geek. I even enjoy doing my taxes. But to have this much tax uncertainty as the end of the year approaches? Not OK. So if I could have one holiday wish on behalf of my readers, it’d be this: Tax certainty. Tax laws that are stable, and for which you can plan.

About Encore

Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.